Short Sales
What is a Short Sale?
A Short Sale happens when the homeowner owes more on their mortgage than what the house is currently able to sell for in today’s Real Estate market. The Short Sale process is usually one of the first steps in the Foreclosure process though the Short Sale is a better option for the homeowner than Foreclosure.
A Short Sale is the sale of a home when the proceeds do not fully pay off the existing loan(s) and the lender(s) accepts a discounted payoff to fully satisfy the loan.
The existing lender typically pays virtually all sales costs, including commissions, escrow and title fees, and repair costs. You get your home sold, the loans paid off and you avoid foreclosure. Lenders will often consider a Short Sale because it can avoid the higher expenses of a Foreclosure and often more quickly. The process takes a bit of time and paperwork, so be prepared for a little extra work.
As you consider the option of pursuing a Short Sale, remember that your lender is looking to limit any potential loss on your loan. By completing a Short Sale, your lender has arrived at a solution that is, for them, much better than a Foreclosure.
Is a Short Sale right for me?
Mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage. If you are faced with a hardship that makes is likely you will be unable to meet your obligation on your mortgage, chances are that your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure.
What sort of hardship would my lender consider legitimate?
To some extent, that will depend on the mortgage company considering the Short Sale request. In general, we have found that as long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by their Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter – the hardship letter sets the tone for the entire file.
Here is a list of “hardships” that are common and frequently accepted by mortgage lenders:
- Family illness or injury
- Illness or injury in the extended family- especially if it forces relocation
- Job relocation when the property is equity deficient
- Job loss or significant income loss
- Divorce or split of domestic partners
- Adjustment in mortgage payment or unforeseen increase in living expenses
I am current on my mortgage, will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. One way to find out whether your lender will accept a short sale file for approval on a loan that is current is by submitting a short sale file to your lender.
Why would a mortgage company agree to accept a Short Sale?
There are actually several reasons why a mortgage company would approve a Short Sale payoff, including the following:
- Legal Concerns – Mortgage lenders have come under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.
- Wall Street is Watching – Mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sold it could impact the lender’s ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.
- Asset Management Expenses- If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage real property assets – homes – spread throughout the region, the state and possibly even the nation. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful Short Sale eliminates most of these costs.
- Reserve Requirement- Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful Short Sale lets the lender put more money to work.
Do lenders approve all Short Sales?
In a word, no. That is why it is critical to work with someone that has extensive experience at getting Short Sales approved.
From the presentation of the Short Sale package to the lender to working with the lenders Loss Mitigations Department, we know how to keep the file moving towards approval.
I have two loans, can I still do a Short Sale?
We can work with both lenders (many times the same lender holds the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of the home is below the balance of the 1st mortgage, we can normally get the two lenders to cooperate.
In the end, neither lender wants to own another home through foreclosure.
My property is in rough shape and needs work, can I still do a Short Sale?
Absolutely. In fact, we found that lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.
Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.
I am concerned about my credit, how will a Short Sale affect my credit?
In the course of getting your short sale approved you may miss your mortgage payments, and these will show on your credit. But once the short sale is approved by your lender, you can avoid foreclosure. According to Christopher Rockey, Director of Education, Mortgage Resolution Services, Sellers will take a bigger hit on their credit report by going through Foreclosure or by giving the lender a Deed-In-Lieu of Foreclosure. Rockey says the points lost on a FICO score (the formula used to assess a borrower’s risk factor) based on credit bureau interviews are as follows:
· Foreclosure or Deed-In-Lieu of Foreclosure: Both of these solutions affect credit the same. Sellers will take a hit of 250-280 points. This means if a seller’s FICO score before foreclosure is 680, they could see it dip as low as 400.
· Short Sale; The affect of a Short Sale on a seller’s credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Rockey says, which will result in a loss of 80-100 points. This means a Short Sale with a previous FICO of 680 could see a fall to 580-600.
Borrowers must realize These Numbers Are Only Theory. They must continue to be responsible with their outside consumer debt. Often if the seller’s hardship is financially related, they tend to fall behind on other consumer responsibilities beyond mortgage related issues.
By avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods and such) relatively quickly.
What if my house sells for less than I owe?
When you house is sold and the amount for which it was sold or transferred is not enough to cover the balance of your loan, the financial institution, with certain exceptions, may have to cancel or forgive the balance between the fair market value of the home and the amount you owe. This balance or deficit is also known as “cancellation of debt”. The institution will file the applicable IRS forms with the amount(s) owed and other relevant information.You will receive a copy of the applicable 1099 form(s) in reference to the amount “forgiven”. Wilth certain exceptions, you may have to include this amount as part of your income when you file your income taxes. Talk to a tax advisor about the potential impact on your tax filings.
A recent law, the “Mortgage Forgiveness Debt Relief Act” amending the Internal Revenue Code, provides additional exclusions for some homeowners who lost their homes, if occupied as their primary residence, and the lender cancelled or forgave the debt secured by the house. This new law can be applied to residential discharged debts of up to $2 million ($1 million if married and filing separately) made on or after January 1 2007, but before January 1. 2010.
Beware of people who promise that you won’t have to bring money into the transaction. There is no way of guaranteeing this.
Contact your tax advisor for specific information based on your personal situation.
Short Sale/Foreclosure Deficiency Judgements
The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. The lender has the sole discretion to pursue a deficiency judgment in those instances when the judgment is permitted.
My income problem was temporary. Do I need to sell my home?
You may be able to keep your home. You need to convince your mortgage company of two main things:
The problem that caused the mortgage payment disruption was beyond your control – illness, injury, temporary disability or forced job change are a few examples; and you are now solidly in a position to stay current on your mortgage payments and to make some progress towards making up the delinquent amount.
Waiting Period Before Buying Another Home:
- Foreclosure or Deed-In-Lieu of Foreclosure- recently Fannie Mae, Freddie Mac have changed their guidelines. Foreclosure is a minimum of 5 years, a minimum FICO of 680, and 10% down payment. A Deed-In-Lieu is 4 years, 680 mid FICO and a 10% down payment.
- Short Sale: A minimum of 2 years, no minimum FICO score or down payment. These numbers are extremely important to know.
How do I get started on a Short Sale?
It’s easy. If you would like to get pre-qualified for a Short Sale, Give us a call.
Bill (503)730-6950 or Dwayne (503)319-4057
You may also contact us through this site. We would be glad to set an appointment and get to work for you. We encourage anyone thinking about pursuing a Short Sale to seek legal and tax advice. |
